Three Ways Phillips 66 is Positioned to Create Value

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When global energy giant ConocoPhillips (NYSE: COP) announced it was spinning off its refining, midstream and chemical businesses into Phillips 66 (NYSE: PSX), the plan was to unlock and create value for shareholders. The management teams of both companies have succeeded where many others have failed.  They’ve delivered on that promise to investors and have unlocked tremendous value since the spinoff occurred.

Now Phillips 66 is ready for its next steps in creating value for investors. The company recently held an investor day where management discussed its future plans.  These plans can be distilled down to three ways it's positioned to create value over both the near and longer terms.

Phillips 66 has two vehicles to grow in the burgeoning midstream industry.  Together with Spectra Energy (NYSE: SE), the companies own a 50% joint venture interest in DCP Midstream, which is the general partner of DCP Midstream Partners (NYSE: DPM).  In addition to this partnership, Phillips 66 separately owns midstream assets.

The company announced plans to form an MLP around some of these midstream assets to fund growth opportunities it sees in the marketplace.  The company is planning an IPO of partner units to raise between $300 and $400 million of capital to grow its midstream business.  Phillips 66 has an assortment of qualified assets to seed the business, including crude and product pipelines, terminals and NGL assets.  That’s in addition to the company’s three NGL fractionators and natural gas pipeline.  Once the IPO is complete, the new company can focus on growing and delivering value.

Despite a renewed focus to grow its own midstream assets, Phillips 66 isn’t backing away from its investment in DCP Midstream.  Together with Spectra, the company is planning to spend $5 billion to $7 billion through 2015 to grow DCP.  By 2015 the companies plan to grow that business from $10 billion in assets to more than $15 billion in midstream assets.  When taken together, these businesses give Phillips 66 two ways to take advantage of midstream growth opportunities to deliver value to investors.

Phillips 66’s chemicals business is part of a joint venture with Chevron (NYSE: CVX) called CPChem.  Together, the companies own a global portfolio with 36 manufacturing sites.  CPChem, despite its global portfolio, is concentrated around the production centers of Saudi Arabia and the US Gulf Coast. 

The company is investing heavily in its Gulf Coast operations with several projects coming online over the next few years, including an ethane cracker and polyethylene complex which will be in service by 2017.  These projects along the Gulf enable CPChem to take advantage of abundant, low cost feedstock provided by the enormous production we'll continue to see out of our vast shale resources.    By locating these assets near cost advantaged feedstock, CPChem is positioned to deliver value for years to come.

Refining, Marketing and Specialties
While both the midstream and chemical businesses are growth opportunities for Phillips 66, the company’s refining, marketing and specialty segment is there to provide steady returns.  This business benefits from the same location advantage as the chemicals business, as it has access to cost advantaged feedstock; the company is looking to further that interest by investing to improve access to more cost advantaged feedstock.  These investments will improve the company’s margins and work in investors' favor.

Bottom Line
Few companies have executed as well as Phillips 66 since being spun off.  The company has been a model for both capital allocation and shareholder focus.  Its shareholder-friendly management team has already grown the dividend 56% since the spinoff while authorizing a $2 billion share buyback, along with plans to reduce its debt by $2 billion over the next year.  When you add its capital discipline to its three value creating businesses, it all adds up to one business that should outperform over the long term.

latimerburned owns shares of Phillips 66 and ConocoPhillips. The Motley Fool owns shares of Spectra Energy. Motley Fool newsletter services recommend Chevron, DCP Midstream Partners, LP, and Spectra Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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